1. Field of the Invention
The present invention relates to a method of detecting fraud in loan application. More particularly, the present invention relates to a method of estimating the risk associated with a contemplated loan, and especially to estimating the risk that a lender may be induced to rely on an unrealistically high estimate of the value of the real property that is to secure the loan.
2. Description of the Related Art
For the purpose of controlling the risk associated with lending money secured by real property, a loan originator attempts to estimate the value of the property being used to secure the note. Traditionally, the originator paid an appraiser, who was supposed to be knowledgeable in the type of real property in question and skilled in comparing such properties, and relied on the appraiser's estimate of the market value of the real property in order to limit the risk that value would be inadequate to secure the note. The use of appraisals continues. In recent years, lenders who wish to rely less on the appraisal have begun using “automated valuation models” (“AVMs”), methods of estimating the market value of a property based on various methodologies such as price indexing methods, hedonic models, adjusted tax assessed value models, and hybrid models.
A lender may also inquire whether the property has undergone certain patterns of frequent sales, loans or refinancings which have, in that lender's experience, come to be associated with attempts to cause artificially high estimates of the value of the property. Additionally, the lender may investigate the creditworthiness of the person applying for the loan. Finally, the lender might seek out information about the applicant's history, taking a particular interest in whether the applicant has been involved in a cluster of activities involving real property in the neighborhood.
Thus, existing methods for fraud detection tend to emphasize either or both of (1) the history of the subject property (the property proposed for a sale or loan), with a special view to any possible “flipping” (rapid series of sales, loans, or refinances), and (2) the history and creditworthiness of the applicant, with a special view to any other transactions in the neighborhood of the subject property.
These methods are not infallible. An appraiser charges a hefty fee, usually requires several days or more to deliver an appraisal, and occasionally turns out to be incompetent, gullible, or corrupt. Persons attempting to inflate the estimated value of a property have been known to engage in patterns of sham sales of the subject property or of nearby properties. They may also act in concert with others to create in the mind of a purchaser or a lender a false impression that properties in the area are appreciating rapidly. Such tactics might also have the effect of feeding artificially inflated values to the automated valuation models that the lender is relying on.
An inexperienced or careless loan officer may be taken in by such schemes. Unfortunately, even a more wary loan officer may hesitate to deny the application or to demand additional information. Lenders are under pressure to avoid the appearance that they are engaging in unfair discrimination against classes of applicants or against neighborhoods which are perceived to be underserved by the banking industry. The lender may fear being sued and being forced at great expense to prove an objective basis for denying an application.
It is therefore necessary for lenders to have more efficient, reliable, objective means of controlling the risk of being victimized by mortgage fraud.